Greece election results: The high price of austerity
Whatever their reservations, Greece’s Left-wing will have to subject itself to ECB and IMF fiscal disciplinecomment Updated: Jan 29, 2015 01:44 IST
The victory of an extreme Left party in the Greek elections on Sunday has once again proved that economic prescriptions are often out of line with political outcomes. Greece landed itself in a financial crisis in 2010. Unemployment soared, the fiscal deficit rose to unsustainable levels, banks were failing, and the economy seemed in urgent need of a bailout, which it got from the International Monetary Fund (IMF) and other funding programmes. In the period May 2010 to next month, Greece will have received 245 billion euros. This bailout was contingent upon the government adopting severe austerity measures. It was then said that unemployment would climb a bit but later come down. Though the austerity measures did succeed in cutting the primary budget deficit, it did little to alleviate the unemployment situation. Overall joblessness now stands at 28%. Wages have fallen and retrenchment is continuing on a massive scale. This, more than anything else, explains the victory of Alexis Tsipras, the far-Left leader, along with some Independents.
The question now in the European policy-making circles and financial markets is whether Greece will stay in the Euro zone. Though the government is collecting a higher share of taxes with respect to GDP, GDP as a whole has shrunk and so has the amount of tax collected. Logically the debt-GDP ratio has climbed. Though Mr Tsipras himself is pro-Euro, and so are the Greek people, the case for keeping Greece in the monetary unit lies with economies with greater financial heft, such as Germany, which had a great say in deciding the bailout package for Greece. The Left-wingers will have to subject themselves to the discipline of the European Central Bank (ECB) and the IMF. The first thing the new government has to do is to secure a write down of its debt.
Unlike 2010 the contagion effects in the event of a sovereign default by Athens are likely to be less now as the other weak economies such as Spain and Portugal have been firewalled. As regards India, it has little fear from any Greek crisis. However, it is not just Greece, the entire European Union is involved here, and the EU is India’s largest trading partner.